By John Revill
ZURICH (Reuters) -The Swiss National Bank raised its policy interest rate by 25 basis points on Thursday as the central bank pressed ahead with its campaign to dampen stubborn inflation and signalled that more tightening was likely to come.
Chairman Thomas Jordan pointed to rising inflationary pressures and the danger of price increases becoming entrenched as the SNB hiked Swiss rates for the fifth time in succession.
Although Swiss inflation ebbed to 2.2% in May from 2.6% in April, there was still more work to be done to tackle rising prices, Jordan told reporters.
"The marked decline in recent months is very welcome," Jordan said. "Nevertheless the underlying inflationary pressure has risen further.
"That means most likely that tighter monetary policy is necessary to bring inflation sustainably below 2%," he said, "But we can also afford the more gradual approach."
While inflation globally has been coming down from its multi-decade peaks, central banks around the world are not quite done yet with their monetary tightening campaigns to bring price rises under control.
Although modest by international standards, Swiss inflation has remained above the SNB's 0-2% target range since February 2022.
On Thursday, the SNB increased its policy rate and the rate it charges on sight deposits to 1.75% from the 1.5% level set in March. The increase, in line with forecasts in a Reuters poll, meant Swiss interest rates were now at their highest level since October 2008.
Still, the Swiss franc fell 0.2% against the dollar after the decision, which disappointed some market players who bet on a bigger 50 basis point move.
The latest SNB hike followed an increase by the European Central Bank, which last week raised euro zone borrowing costs to their highest level in 22 years.
Although the U.S. Federal Reserve left interest rates unchanged last week, it signalled further hikes by the end of the year.
Even with the Thursday's rate increase, the SNB forecast Swiss inflation would remain above its 0-2% target by 2026.
The central bank also raised its inflation forecasts for 2024 and 2025. The projected above-target inflation can be seen as indicating further tightening in the future.
The SNB said it also remained ready to intervene in currency markets.
In recent months the central bank has been selling foreign currencies to boost the value of the Swiss franc, whose strength has reduced the effect of more expensive imports.
Jordan said that although Switzerland had lower inflation than other countries, it was dangerous to sit back and accept the current level of price increases.
"Inflation would most likely not stabilize but would rather go up again and we would have to fight inflation further down the road with more rate increases," he said.
Analysts said they expected another hike at the SNB's next meeting in September, especially following latest rise and Jordan's comments.
"The message is that the job is not done," said Gero Jung, an economist at Mirabaud. "In sum, quite a hawkish hike."
Charlotte de Montpellier at ING said Thursday's action made her change her outlook.
"Before today's meeting, I thought that this rate hike was going to be the last of the cycle," she said. "However, in view of the inflation forecasts and the message, I am going to revise my forecast and anticipate a further rate hike in September."